Stable coins are underpinning the majority of digital asset borrowing and lending

New research has shown that 68% of institutions involved in the lending and borrowing of digital assets are using stable coins pinned to fiat currency to minimise exposure to cryptocurrency volatility, according to new research.

The report from digital asset securities lending platform Lendingblock surveyed institutions including market makers, custodians and hedge funds and found that the majority are turning to stable coin for lending and borrowing, along with 64% using it as collateral.

Stable coins are a form of cryptocurrency tied to fiat currencies that provide more stability than digital assets such as Bitcoin. They retain the features of cryptocurrencies, such as decentralisation, without the extreme volatility swings. JP Morgan’s JPM Coin is a form of stable coin where it is tied to the US dollar, and is used by the bank internally for payments.

In a process such as securities lending and borrowing, stability is far more crucial for those involved.

“Stable coins would give institutions exposure to the US dollar and provide some stability and endurance from the existing financial system,” said Steve Swain, CEO of Lendingblock.

“We believe these are the types of advances that the industry needs to build out the lending infrastructure that we know is already such a critical component in mature capital markets.”

At the end of 2018, a New York State regulator approved separate dollar-linked tokens from Paxos and Gemini which will be pegged to the US currency. Meanwhile outside of the capital markets, reports this week have circulated that Facebook is planning eyeing its own stable coin later this year.

Lendingblock’s survey also included responses from prop traders, lending businesses and exchanges.

Of the respondents, 41% of the institutions sampled also stated that they would expect to be making more than five loans at any one time. Half of those surveyed said they expect to lend or borrow between $1 million and $5 million equivalent at any point,

“Firms are increasingly relying on borrowing digital assets for working capital purposes,” the report stated. “This highlights a shift that reflects a reliance on and belief in crypto to support everyday business operations rather than short term bets on assets dropping in value.”

The report examined the borrowing and lending needs of leading crypto institutions between January and April 2019.